George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”In line with the post last night about Michael Walzer's piece in Dissent, I was struck by this:
And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street.
Time and again, Mr. Greenspan — a revered figure affectionately nicknamed the Oracle — proclaimed that risks could be handled by the markets themselves.
“Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury,” recalled Alan S. Blinder, a former Federal Reserve board member and an economist at Princeton University. “I think of him as consistently cheerleading on derivatives.”
Arthur Levitt Jr., a former chairman of the Securities and Exchange Commission, says Mr. Greenspan opposes regulating derivatives because of a fundamental disdain for government.
A disdain for government. This is what fundamentally ties all of these jokers together, the like Bush, Cheney, GAlberto Greenspan, Paulson, and the rest of the criminal gang. Government is for people who follow rules. They don't need no stinking govenment. They will not tolerate restrictions on their freedom to do as the damn well please. Nothing, no matter how prudent, could be allowed to impede their philosophy of destruction. They also do not deal well with people who are not of their tribe:
In 1997, the Commodity Futures Trading Commission, a federal agency that regulates options and futures trading, began exploring derivatives regulation. The commission, then led by a lawyer named Brooksley E. Born, invited comments about how best to oversee certain derivatives.
Ms. Born was concerned that unfettered, opaque trading could “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it,” she said in Congressional testimony. She called for greater disclosure of trades and reserves to cushion against losses.
Ms. Born’s views incited fierce opposition from Mr. Greenspan and Robert E. Rubin, the Treasury secretary then. Treasury lawyers concluded that merely discussing new rules threatened the derivatives market. Mr. Greenspan warned that too many rules would damage Wall Street, prompting traders to take their business overseas.
“Greenspan told Brooksley that she essentially didn’t know what she was doing and she’d cause a financial crisis,” said Michael Greenberger, who was a senior director at the commission. “Brooksley was this woman who was not playing tennis with these guys and not having lunch with these guys. There was a little bit of the feeling that this woman was not of Wall Street.”
Not one of us, was she? I can imagine the kind of language used to describe Ms. Born when the players were forced to contend with a grown-up. I am disgusted to see how prominent a role Rubin played in all of this, btw, and note that while the Republicans were more deeply committed to this kind of boundary destroying behavior, there were far too many on the Democratic side ready to go along. And they did not play nice:
Despite that event [the hedge fund Long Term Capital Management nearly collapsed], Congress froze the Commodity Futures Trading Commission’s regulatory authority for six months. The following year, Ms. Born departed.
In November 1999, senior regulators — including Mr. Greenspan and Mr. Rubin —recommended that Congress permanently strip the C.F.T.C. of regulatory authority over derivatives.
Mr. Greenspan, according to lawmakers, then used his prestige to make sure Congress followed through. “Alan was held in very high regard,” said Jim Leach, an Iowa Republican [And enthusiastic Obama supporter] who led the House Banking and Financial Services Committee at the time. “You’ve got an area of judgment in which members of Congress have nonexistent expertise.”
As the stock market roared forward on the heels of a historic bull market, the dominant view was that the good times largely stemmed from Mr. Greenspan’s steady hand at the Fed.
“You will go down as the greatest chairman in the history of the Federal Reserve Bank,” declared Senator Phil Gramm, the Texas Republican who was chairman of the Senate Banking Committee when Mr. Greenspan appeared there in February 1999.
... [In 2000,] The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.’s authority to an 11,000-page appropriations bill. The Senate passed it. President Clinton signed it into law.
Ah, yes, Leach and Gramm, the two gentlemen who shepherded the revocation of Glass-Steagall through the Congress, with the helpful assistance of Chris Dodd and Chuck Schumer. We should add them to the web of connections. And, remember kids, the House and Senate were Republican controlled at the time and this was all happening in the midst of the impeachment dabacle, when Democrats were outdoing themselves to throw their own party leader under the bus while letting the Republicans ram through crap like this.
The article is long and detailed, with a good amount of background on Greenspan's philosophy of economics. Read the whole thing. Bill Clinton should not have kept him on. This was someone who despised government and so had no business being connected to it. With luck, after this crisis, no one will listen to The Oracle every again.